Today’s Blog – Tuesday 14th July 2015

Today’s AFR echoed a point made in this blog yesterday about the potential for early revenues from various LNG projects coming on line to disappoint (following the lagged effect of declining oil prices on LNG contract prices).

In my view, the potential downside could be even larger than is generally thought. In the latter half of this year we will see a lot of commissioning LNG cargoes destined for LNG spot markets – from projects in locations ranging from Queensland, Louisiana, Sulawesi, Western Australia, etc. The current LNG spot market is very tight – witness the report we made a couple of months ago about total Japanese spot market purchases within a single month being only a single cargo.

The commissioning projects need to make sales in order to “prove up” their facilities and validate upstream performance – only then will they commence sales under long term contracts (this is what Origin Energy Ltd [ORG] told us two weeks ago about APLNG’s sales contracts).

One can therefore see it being economic for commissioning cargoes to be sold for next to nothing – or even for buyers to be paid to take them. Once again, this risk demonstrates the value of having integrated LNG trading capabilities and infrastructure given the current inefficiencies in the LNG market.

Commodity prices

Crude prices fell slightly overnight, with Brent closing at US$57.85 and WTI at US$52.20. The Iranian nuclear negotiations are continuing through their nth deadline and thus Iranian oil continues to hang over crude markets.

The rig count numbers issued on Friday showed a second week of oil rig increases in the US – there will be a lag effect before we test the thesis that a ~$US50 price will see rigs pulled back again.

Somewhat surprisingly, production numbers for North Dakota (being a good proxy for the Bakken as a whole) actually showed an increase for the month of May, after falls in prior months. This provides some support for the industry’s promotion of its productivity gain achievements – albeit these are easier to achieve by targeting the sweet spots only for new wells being drilled (and hence likely locking in poorer than average performance for the lower quality wells that remain to be drilled down the track).

Henry Hub showed a gain to a one-month high of US$2.86 overnight, driven as nearly always by US weather conditions.

LNG

As noted above, Iranian oil currently hangs over crude markets. Iran also has the world’s largest natural gas “reserves” (a word used loosely in this context) of ~1,200 TCF.

A recent report from Fitch noted that converting those reserves to exports would take ~five years for pipeline gas and ~ten years for LNG exports. Given the experience of Iran’s cross-Gulf neighbour, Qatar (who shares an exceptional gas field with Iran – and in this context “sharing” might mean “sucking out as hard as they can while they can”), Iranian LNG would likely be highly cost competitive – and well placed geographically to serve markets to its East and West.

Of course the very large and low cost Iranian gas reserves serve to underline that the country’s nuclear program is solely about weapons and not electricity – gas-fired power with say ~$2-3/mmbut fuel input costs is much cheaper than nuclear power.

Governments and fracking

The Dutch Government has recently extended its shale gas ban – for a further five year period. No real reason was given for doing so – the relevant Minister said: “Research shows that there is uncertainty about the effect shale gas extraction would have.” – Sir Humphrey Appleby would be proud!

Holland also happens to host a very large and long life conventional gas field whose extraction now seems to be the cause of mini-earthquakes – but heaven forbid saying anything about that when anti-fracking gesture politics is so much more appealing!

Some good news for a change for the Queensland LNG projects – the BG Group operated QCLNG project has just loaded its first cargo from its second train. The first train has now delivered 27 cargoes and the project is on track to produce at a capacity of 8 mmtpa by mid next year.

This solid performance should signal that the other Queensland LNG projects operated by STO and ORG, who are due to commence sales imminently, do not face systemic issues about CBM-to-LNG.